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European Union

Fuest: 'EU recommendations count for little'

The EU Commission is formulating economic policy recommendations for member states. But even though it's good advice, countries are still dragging their feet, says economist Clemens Fuest.

DW: Six years into Europe's banking and economic crisis there are countless ideas to reduce the vast debt that's been accumulated. And once again the European Commission has released its report outlining country-specific recommendations. What do you make of these reports?

Clemens Fuest: I've got the impression that such recommendations influence the public and economic debate on a national level. Unfortunately, the direct impact on economic policy is limited though. Little has been implemented with regard to past recommendations.

That also goes for Germany. For instance, the Commission said Germany should cut back on the number of goods with a reduced tax rate. It also said that property tax was too low. It called on Germany to create more incentives for second earners to get active and reduce the number of mini jobs in favor of regular employment. These are all good ideas - but
Germany hasn't implemented a single one yet.

Did Germany's failure to take any of this on board harm the Germany economy last year?

There haven't been any consequences for Germany in terms of sanctions by the Commission. This is questionable. If the EU Commission makes sound proposals and is ignored by the EU member states, it's clear that these recommendations count for little.

Of course it's not the Commission but the national parliaments that are responsible for their own country's economic policy, but many people hope nonetheless that the economic policy stands to profit from cooperation at a European level. And politicians also portray these recommendations as binding. But in reality their impact is limited.

Germany isn't the only country ignoring the recommendations by the EU Commission. The difference is that countries such as France and Italy have been stuck in recession for some time now.

Absolutely right. Last year, France was called upon to reduce its deficit far below four percent. It failed to do this and the deficit hit 4.3 percent in 2013. France has also been asked to simplify its tax system and reduce taxes. Again to no avail.

Italy has been asked to reduce its deficit below three percent and reform its tax system. They should be slashing their income tax and increasing the consumer and property taxes. None of this has happened.

Tax hikes boost state revenues, but many states don't invest the money.

If only they'd consolidate their budgets, that would be nice. In Italy the debt ratio is at 132 percent - high time to consolidate the budget. But of course you can't achieve this with tax hikes alone. You also have to keep an eye on spending.

It's also important to invest. If you don't, economic growth will decline. But the public investments are very marginal compared to overall expenditure. Social spending and civil service costs make up a much larger chunk. It's important to cut back here - not on investments.

But the cutbacks affect those in our society who've already been hit hard by the economic crisis. The French government has announced reforms modeled on Germany's "Agenda 2010" and were punished at the European elections as a result. How can politicians achieve the necessary reforms without overburdening the people?

The first step is to be honest. The French government was punished because the president pretended that France's major economic challenges could be solved without hurting anyone: merely by redistributing and without encroaching on public spending. If you spread such pipe dreams, you'll realize soon enough that this is not going to happen.

My first big recommendation would be to tell the people with perfect candor that France has big economic problems. These can be solved, but the solutions require an increase in the retirement age and other burdens as well as cutting back public spending. Then the people also won't vote for the Front National. If you can't afford certain things, you simply need to tighten the purse strings.

Unemployment remains at a high level in the sixth year of the eurozone crisis. Many countries lack competitiveness. What can, for instance, Italy and France do to promote economic growth?

Both countries, Italy more so than France, suffer from anemic growth. In both countries the main problems are related to excessive labor market regulations. Those who have jobs are protected and this works to the disadvantage of the unemployed as well as the younger generation.

The unemployment figures are very high in both countries. They have an inefficient tax system and excessive income tax rates. In contrast to consumption, property and land are not taxed enough. Wage-setting is also problematic in both countries. Ultimately, you can't offer wages that outstrip productivity or there'll be layoffs. Many different reforms are necessary. These aren't reforms that will generate growth overnight but they will, in the medium term, render the economy competitive and that's what should be addressed right now.

Clemens Fuest is an economist and professor at the University of Mannheim. Currently, his main topics of research are the eurozone debt crisis and international tax competition. He's also the President of The Centre for European Economic Research (ZEW) in Mannheim and a member of the Academic Advisory Board of the German Federal Ministry of Finance.